The precedent also spooked the market. If bonds are sacrosanct more out of precedent than law, Stockton could be a game-changer.

"Dozens of cities in California, including Oakland, Sacramento and Los Angeles, are slouching toward insolvency, but only a few ... have taken on the unions and restructured worker retirement benefits," the Wall Street Journal warned this week.

"Many are instead borrowing to pay their retirement obligations just as Stockton did, thereby shifting the risk of paying for pensions to the bond markets."

Wall Street doesn't see why public employees deserve special treatment in Chapter 9. It has challenged Stockton's eligibility for bankruptcy based partly on this alleged unfairness.

Meanwhile, the prospect of pension cuts roused the state Public Employee Retirement System. CalPERS manages the U.S.'s largest public pension fund ($233.4 billion) for about 1.6 million public employees.

Stockton worries CalPERS, too. State law protects pensions. But federal law trumps state law, and Stockton's bankruptcy is in federal court.

CalPERS has allied with Stockton to fight Wall Street's challenge.

That's the first big irony of Stockton's insolvency. During the dotcom boom, CalPERS encouraged cities to offer enhanced retirement benefits.

It even assured cities they could do so at no additional cost (!) because their investments were doing so well. When the dotcom boom tanked, CalPERS left cities holding the bag.

These rookies must police a city with a violent crime rate in the top 10 nationwide. Clearly, seasoned officers are essential in helping them make critical judgment calls.

The city's argument, then, is that cutting pensions would compromise its ability to protect its citizens' health and safety.

City officials also point out that Wall Street enthusiastically sold Stockton the bonds that deeply indebted the city. Bond houses didn't advise taking on the unions as the Wall Street Journal piously does now.

And bond insurers knew - or should have known - the risk. Insurers who misjudge risk sometimes must pay claims.

Wall Street doesn't buy it. "Investors who fail to impose discipline on deadbeats are likely to find the deadbeats playing them for suckers," the Wall Street Journal wrote.

Besides money, that's what the big fight in 2013 will be over: to "impose discipline" on Stockton and by extension on all cities so Wall Street need not share in the sacrifices of the recession its reckless lending did so much to create.